Why It Might Not Make Sense To Buy Lancaster Colony Corporation (NASDAQ:LANC) For Its Upcoming Dividend

By
Simply Wall St
Published
November 27, 2021
NasdaqGS:LANC
Source: Shutterstock

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Lancaster Colony Corporation (NASDAQ:LANC) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Lancaster Colony's shares before the 3rd of December in order to receive the dividend, which the company will pay on the 31st of December.

The company's upcoming dividend is US$0.80 a share, following on from the last 12 months, when the company distributed a total of US$3.20 per share to shareholders. Calculating the last year's worth of payments shows that Lancaster Colony has a trailing yield of 2.0% on the current share price of $157.59. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Lancaster Colony

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Lancaster Colony paid out more than half (61%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Lancaster Colony paid out more free cash flow than it generated - 181%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Lancaster Colony paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Lancaster Colony's ability to maintain its dividend.

Click here to see how much of its profit Lancaster Colony paid out over the last 12 months.

historic-dividend
NasdaqGS:LANC Historic Dividend November 28th 2021

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Lancaster Colony, with earnings per share up 2.1% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Lancaster Colony has increased its dividend at approximately 9.3% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Lancaster Colony? Earnings per share have grown somewhat, although Lancaster Colony paid out over half its profits and the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Lancaster Colony.

Curious about whether Lancaster Colony has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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